While many of us are accustomed to seeing a lower cash price at gas stations vs. paying with debit or credit cards, differential pricing remains the exception rather than the rule with most other U.S. merchants. This blog explores cash as the lowest
cost payment type and looks at how digital technologies may further impact this phenomenon in the future.
Setting higher prices for consumers who pay with debit or credit cards is done to defray the payment network interchange fees—which are paid by the merchant. These interchange fees vary according to many factors, are specific to a particular country, and
are regulated by central banks and/or government agencies. Since this topic is inherently complicated, this post will focus on differential pricing within a single country, the U.S., but the major point can apply to many other countries.
A brief history of differential pricing in the U.S.
In 2011, Harvard Business Review wrote about the differential pricing between paying with cash and debit or credit cards in an article, entitled, “Should You Offer Different
Prices for Cash and Credit?” The author spoke for many when he stated:
“If merchants start offering a 2-3% discount to pay by cash, my love affair with plastic will wane. I won’t ditch credit cards entirely, but I’ll definitely say ‘charge it’ less frequently. It would irk me to pay an additional 2-3%
to use a credit card when paying by cash is ‘free.’ As a result, I’d patronize retailers that offer cash discounts over those with higher ‘same cash or credit’ prices.”
In 2012, U.S. merchants gained the right to impose a surcharge of up to 4% of the credit card purchase as the result of a class-action law suit settlement between retailers, Visa, MasterCard and major U.S. banks. However, merchants are still uneasy about
implementing these surcharges for fear of upsetting their customers.
Whether a U.S. merchant can today include surcharges for different payment card types remains complicated. This
Consumerist article details the U.S. states (10 of them) which do
not allow differential pricing.
That said, there are significant hidden costs of cash of which Quisk has previously written. These costs are, unfortunately, borne disproportionately by the people
that can least afford them—typically the unbanked or under-banked segments.
The ideal future payment type would be one that has the lowest cost—like cash, BUT does avoid the hidden costs of cash. Does digital technology enable this new payment type to be created tomorrow?
The future opportunity: Digital cash
Most people would agree that consumers would always like to be able to pay the lower cash price, but
not be burdened by the hassles and risks of having to get and carry cash on their person. Merchants, primarily, want
more customers and secondarily prefer a payment type which would let them keep more of their hard-earned profits.
Digital cash is this new, lowest cost payment type. And we are
not talking about Bitcoin or another unregulated crypto-currency. We are talking about a solution which digitizes the currency used within a country and which is regulated by its central bank. This type of digital cash would be the consumer’s money from
their bank, but without the cash and without the cards.
Digital cash can provide the best of both worlds for consumers—through lower prices
and more convenience, and for merchants—through higher profits and happier customers. Better and less expensive. Now that is a winning value proposition. Let us know what you think.